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Should Investors Buy Pfizer on the Dip?

By David Jagielski - Feb 6, 2020 at 11:38AM

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Pfizer is down 10% over the past 12 months, although it has shown signs of life as of late.

Pfizer (PFE 1.50%) still hasn't recovered from the fall the stock took back in late July, when analysts downgraded the stock after a disappointing earnings result and forecast, affected by the company's decision to exit its Upjohn business. Although the stock has been rallying in the months since then, over the past six months, it's up just 4% and nowhere near the S&P 500's returns of 16% during that time. Pfizer has also been struggling in recent days as it released its fourth-quarter results on Jan. 28, which didn't inspire much enthusiasm from investors.

However, let's take a look at whether the underperforming stock is likely to rally, or if more red is in its future.

The big concern for investors: growth

There are many question marks surrounding how Pfizer will do post-Upjohn, and right now, investors aren't convinced that the company will do well -- at least not yet. It disappointed investors in Q4, with sales down from the prior-year quarter while earnings missed expectations. However, the company did indicate that it expects the new-look Pfizer to achieve operational revenue growth of 8% for 2020.

Over the longer term, spinning off the Upjohn business, which features off-patent medicine, could be a way for Pfizer to focus on higher-growth products that can generate more revenue for the company. However, it's still unclear how all of that will pan out and just how much additional growth the company will generate. For now, it looks as though investors need some convincing of that given their lack of enthusiasm thus far.

Pills spilled out from a bottle.

Image source: Getty Images.

With Pfizer also combining its consumer healthcare business with GlaxoSmithKline, it's difficult for Pfizer investors to gauge just how strong the company will be once all the dust settles from these moves.

Still, what's encouraging is that many of Pfizer's biopharma products saw strong growth in 2019. Ibrance, Eliquis, Vyndaqel, Xtandi, and Xeljanz all generated more than 20% sales growth operationally during the year, contributing a combined $12.7 billion. That's more than one-quarter of the company's revenue for the year, which totaled $51.8 billion. With those drugs playing such a big role and already achieving such strong growth, there's reason to be optimistic that Pfizer may not be in as much trouble as its share price suggests.

Dividend is a consolation for impatient investors

For companies that may take a while to achieve longer-term growth, a dividend can go a long way in appeasing investors who may otherwise not be willing to wait. Currently, Pfizer pays investors a dividend yield of 4% per year. What's even better is that the company recently raised its quarterly payments from $0.36 to $0.38. Pfizer's strong track record of not just paying dividends but increasing them can give investors an added incentive to buy and hold the stock for multiple years.

The company's dividend payments have more than doubled from 2010 when Pfizer was paying its shareholders $0.18 every quarter.

Is the price right?

Pfizer has a good dividend as well as products that are generating solid growth for the company. The last factor to consider in the decision-making process is whether it's well-priced. Trading at 13 times earnings and a forward price-to-earnings ratio of just 12, Pfizer is attractive given that the company hasn't run out of growth options just yet. Its PEG ratio of 1.4 also suggests that given the growth analysts are expecting from the stock, it's not that expensive.

Investors typically discount a stock when there's some risk or uncertainty involved, and that looks to be what's happening with Pfizer:

PFE PE Ratio Chart

PFE P/E Ratio data by YCharts.

Although the stock has traded at lower multiples in the past, its current price suggests the stock is likely undervalued, especially if it becomes a better growth stock as a result of the Upjohn spinoff. For long-term investors who are looking for more than just growth, Pfizer is an excellent option. The healthcare stock could be a great buy for many years.

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Stocks Mentioned

Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$50.67 (1.50%) $0.75
GlaxoSmithKline plc Stock Quote
GlaxoSmithKline plc
GSK
$44.37 (2.42%) $1.05

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